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Non-solicitation agreements are void in California...or are they?

There is certainly no question that an employee owes undivided loyalty to his or her employer while employed. For example, no one questions that an employee is prohibited from working for a competitor during his employment. But the law becomes much more complicated once an employee leaves his or her employment. Under what circumstances may a former employee solicit his former employer’s customers? Can non-solicitation agreements ever be enforceable?

California of course is one of a very few states in which non-compete agreements are void as against public policy. Business and Professions Code section 16600 provides that “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The exceptions to this rule are very limited, and they deal mainly with the sale of a business or dissolution of a partnership. However, through adoption the Uniform Trade Secrets Act, commonly referred to as CUTSA, California also makes it illegal for employees to misappropriate trade secrets from a former employer and to use those trade secrets to solicit customers of the former employer.

Thus, on one hand, there is a long line of California cases that has repeatedly held that a former employee may be barred from soliciting existing customers to redirect their business away from the former employer and to the employee’s new business if the employee is utilizing trade secret information to solicit those customers. But on the other hand, the California Supreme Court has made clear that even narrow restraints on competition – for example, agreements that purport to bar a departing employee only from competing against his former employer – are invalid under section 16600.

While acknowledging California’s protection of trade secrets, the California Supreme Court so far has specifically declined to address whether there is a so-called “trade-secret exception” to section 16600. Several decisions from courts of appeal have suggested that there is no such exception. Specifically, a court may not enforce by way of injunctive relief a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee’s new business, but a court may enjoin tortious conduct (under CUTSA and/or the Unfair Competition Law) by banning the former employee from using trade secret information to solicit such customers.

So, it would seem clear that a court cannot simply enjoin a former employee from soliciting current customers of his former employer, except maybe to the extent the former employee is using trade secrets to do so. But that is precisely what Judge James Robertson of the San Francisco Superior Court appears to have done recently in Guardsmark v. Bowman, Case No.CGC-14-537022.

The allegations of the complaint portrayed extreme, but not unheard of, conduct on the part of former employee Bowman. According to the complaint, Guardsmark provides security services to, among other entities, San Francisco’s Department of Human Services (“DHS”). Guardsmark had employed Bowman since 1993, and in 2005 he became the manager in charge of its San Francisco branch. While employed, Bowman signed an agreement which stated that he would refrain from misusing Guardsmark’s confidential information, including “any and all confidential records of Guardsmark, its clients, prospective clients [and] trade secrets.”

The complaint alleged that, unbeknownst to anyone at Guardsmark, Bowman had formed a competing security services company, Teton Security Services, Inc., in 2008. The complaint further alleged that despite Bowman’s responsibility to manage the DHS account for Guardsmark, when that account came up for re-bid in the Fall of 2013, he concealed certain information from Guardsmark about the bid he prepared for Guardsmark and the fact that Teton submitted its own bid for the DHS contract, allegedly using certain of Guardsmark’s confidential information in doing so. Guardsmark also claimed that when Teton eventually won the bid for the DHS contract, Bowman concealed that fact from Guardsmark in an apparent attempt to prevent Guardsmark from administratively challenging DHS’s decision. Guardsmark was the second-place bid, which suggested that DHS would have given the contract to it had Teton not submitted its bid.

The permanent injunction entered by Judge Robertson was apparently the product of a joint request by the parties and was among the terms in a settlement of the lawsuit. Among other things, the injunction prohibits Bowman and Teton from contacting or soliciting any of Guardsmark’s current customers in San Francisco and from taking any action to induce any of Guardsmark’s current customers in San Francisco to discontinue service with Guardsmark. Notably, there is no reference at all to the misused trade secrets relief in the court’s injunction order.

It would seem clear that a contractual agreement containing similar language would be void pursuant to section 16600. At best, it might be enforceable only to the extent it protected trade secrets. However, pursuant to California law, an injunction will be enforced unless a party can establish that the injunction was issued beyond the trial court’s jurisdiction. An injunction is considered to be in excess of a court’s jurisdiction if the court lacks personal or subject matter jurisdiction, or if the injunction on its face violates a constitutional provision or express statutory declaration. Because the injunction in this case would be valid if the information at issue is a trade secret, it is not invalid on its face and it is therefore likely enforceable.

The practical effect of this ruling is that it shows that the parties to an unfair competition lawsuit may stipulate to a non-solicitation agreement as part of an injunction even if that agreement is broader than that which would be allowed by contract. So an agreement between Bowman and Guardsmark that Bowman would not solicit Guardsmark’s customers when he left his employment would be invalid under section 16600, but the exact same agreement would most likely be enforceable when reached as part of a stipulated injunction. Essentially, a former employee sued for unfair competition by his former employer may lose the protections of section 16600 and be broadly prohibited from competing against his former employer by stipulating to such prohibitions in an injunction.